The G7 Is Still Pushing Its Nutty Russia Oil Price Cap Idea

Even observers who are generally very well informed but not strongly interested in finance are ridiculing the barmy idea of imposing a price cap on Russian oil sales. This move is perceived to be necessary because the other Western-devised sanctions against Russian energy sales, of first trying to embargo them, then realizing that that would amount to shooting too many economies in the head, then having what amounted to a partial embargo drive oil prices way up, made Russia fat and happy on lower petroleum sales.

This brilliant bunch, not having worked out that they are unable to anticipate obvious effects of their moves to pummel Russia, are doggedly trying to get a bad idea first floated by Mario Draghi, then touted by Janet Yellen, then taken up at the last G7 meeting, of imposing an oil price cap on Russia off the ground.

Mind you, the scheme should have been relegated to the dustbin by now. The only way something like this might have a dim possibility of success is if you got a very substantial majority of buyers to hang together. China already rejected the idea in particularly tart terms, expressing its hostility to the nerve of the G7 trying to insert itself in trade relations between Russia and China. Whoever wrote the Global Times editorial was having quite the go at the G7:

Yet, the problem is that G7 nations are no longer major buyers of Russian oil, and as an unrelated third party, the G7 has neither the qualification nor the market power to dictate energy trade among China, India and Russia.

Western media reports so far suggested that the West may impose such a price cap through insurance. About 95 percent of the world’s tanker fleet is insured through the International Group of Protection & Indemnity Clubs in London and some companies in other European countries. G7 could tell crude buyers that if they want to continue using the insurance service for Russian oil shipment, they need to agree to a “capped price.”

But even that could also fail to pressure Russia, as Russia has already prepared an alternative by offering insurance through the Russian National Reinsurance Company, according to media reports.

Even though tankers make a point of carrying insurance, as an insider pointed out, “All that does is give you the right to sue the insurer.”

Needless to say, China having taken such a forceful stand makes it easier for India and the Global South to say no, aside from the fact that they have other reasons to play nice with Russia (like fertilizer sales).

Oh, and another wee problem is in the highly unlikely event that the G7 were to get somewhere with this idea, Russia has made clear it’s not going along with the price cap. Goldman warned that prices could jump to over $200 a barrel and JP Morgan, as high as $380, if Russia decided to stare the West down and withhold supply. Deputy chariman of Russia’s security council, Dimitry Medvedvev, apparently follows Western analysts. From Reuters:

Russia’s former president Dmitry Medvedev said on Tuesday a reported proposal from Japan to cap the price of Russian oil at around half its current level would lead to significantly less oil on the market and could push prices above $300-$400 a barrel.

Commenting on the proposal, which was reportedly put forward by Prime Minister Fumio Kishida, Medvedev said Japan “would have neither oil nor gas from Russia, as well as no participation in the Sakhalin-2 LNG project” as a result.

Russia is restructuring the Sakhalin-2 LNG joint venture. Russia is the majority owner. Minority owner Shell has said it wants to sell its stake…and Russia cleared its throat, since Russia is not going to allow Shell to freely transfer a strategically important asset, particularly since the world has too many unfriendlies now. So Russia is requiring the minority owners Shell, plus Mitsubishi and Mistui, to reapply. The Japanese companies together own 22%.

The project is a critically important source of gas for Japan. Medvedvev is not threatening to cancel the Japanese supply contracts. But if the Japanese were kicked out as minority owners for behaving badly over oil price caps, it’s not much of a stretch to think that their supply agreements would not be renewed when their term is up.

Despite the obstacles described above, per a Bloomberg report yesterday, the G7 is still faffing about with the scheme:

The US and its allies have discussed trying to cap the price on Russian oil between $40 and about $60 a barrel, according to people familiar with the matter.

Allies have been exploring several ways to limit Russia’s oil revenues while minimizing the impact on their own economies in discussions that began in the run-up to the Group of Seven summit….

Biden administration officials are having multiple meetings a week on the price cap now, trying to push it into reality, one official said. The effort will intensify in the coming weeks, the official said…

While oil caps got a mention in the G-7 communique, there is a lot of skepticism that an agreement will be reached in the near future as the idea still needs fleshing out and there are a number of obstacles. Nevertheless, discussions are ongoing to try to nail down a concrete proposal.

Needless to say, the Twitterverse has been amusing itself:

And in the “be careful what you asked for” category:

You may have noticed that the Biden Administration is still pushing this idea. So sadly this may not be the last you hear of it.